Ways to Save For Your Child’s College Education
One of the biggest expenses in life is education. So many of today’s youth will exit college with a tremendous amount of debt. No parent wants to see their child start their adulthood buried in financial trouble. One of the ways to give your child a head start is to start saving for college as soon as possible.
Where Does the Money Come From?
- Birthday Money: From an early age, grandparents and relatives want to shower the little ones in gifts. Of course they should! But, you child doesn’t need 15 stuffed animals. Rather than spending hundreds of dollars on toys that will sit on shelves ask, your family members to put a portion of the birthday money into your child’s college fund. Grandparents love giving tangible gifts because they want to see the child’s face light up with joy when they unwrap the gift. They can still give one or two toys, but make it a point that giving to their college fund is equally as valuable a gift. This doesn’t have to be limited to birthdays. Christmas, or any other time your child receives gifts, make the college fund available.
- Your Child Pitches In: As your child ages, teach the importance of saving for the future. As they start working as babysitter, or doing lawn care, encourage them to set aside 3% of their earnings to go to their college savings. You can make the challenge more enticing by promising to match their givings. It’s important that your child understands the sacrifice of college. Let them be a part of the process so that they value their education and work hard for their grades. It always means more when you’ve paid for it.
- A Percentage of Your Paycheck: Commit to put 1-2% of your annual paycheck into the college fund. Small, steady amounts added to the fund will make the money grow exponentially over time. It’s easier to put away small amounts at a time, rather than one large chunk of cash all at once. $50 here and there isn’t as painful to your daily budget as laying down $600 all at once.
- IRA: Savings accounts are fine, but it’s better to put your money into the stock market to let it grow with little to no work from you. An IRA is a private stock fund that you can control. Typically, you have to start with about $3,000 to open an account. At that point, you can choose which style of funds you’d like to invest in. You can choose to invest in mutual funds to spread you risk out over many different companies, or you can choose to put most of it into one company.
You can select to have a high stock concentration. This is the highest risk, but it also can give you the highest reward. Or, you can opt to have a high bond concentration. These are more stable, but they will not give you the same results as a stock. The rule of thumb is that if you have over 5 years to work with, put your money into more stocks. The chances are that if the market does dip down, you’ll have ample time to build your money back up. If you have less time, stick to bonds.
- 529 Savings: This is one of the more popular options for college savings. This savings fund is specific to education. There are a number of positives to this style of saving. When you open the account, the money is placed into more aggressive stocks to gain as much money as possible in the early years. Then, as the child nears college, the account is transitioned over to a more stable, bond format. The gains on this plan is tax-deferred, and even when it is taken out to use on education, you will not pay taxes on it.
On the other side, if your child decides not to go to college, then you’re limited. You can change who the beneficiary is to ensure that the money goes to education, or the child can take out the funds, but it’ll cost them in penalty fees. Another downside is that you have less control over the account. You are only able to switch to different funds twice in a year.
Saving for college can be overwhelming, but little steps over the years will make saving easy. Teach your child about how to save and encourage them to become part of the process. As they look at different schools, they’ll realize the worth of the education and will put more effort into their studies.